How the Bank of Canada Has Performed in 2015

Stephen Poloz has kept markets on edge ever since an unexpected rate cut to the Bank of Canada’s key interest rate in January, the first adjustment in four-and-a-half years.

The Bank of Canada governor and his policy team are likely to keep their options open, maintaining the trendsetting lending level at 0.75 per cent — down from the one per cent set in September 2010. Poloz has said the “insurance” cut is working for now.

However, a lot has happened since the central bank’s surprise 25-basis-point cut on Jan. 21. The Canadian economy has been sideswiped by the global collapse in oil prices, threatening to pull resources-dependent Alberta into recession, perhaps Saskatchewan along with it. It hasn’t helped that the U.S. economy also got off to a slow start in 2015.

Some of Canada’s top economists share their views on the Bank of Canada’s policy decisions this year — their effectiveness and where the key borrowing level is heading next, and when.

Douglas Porter, BMO Capital Markets chief economist

“I think [the rate cut] was modestly effective. We are talking about a 25-basis-point cut. Ultimately, only 15 basis points of which showed up in prime lending rates. Initially, of course, there was a shock reaction by the Canadian dollar. There was a shock reaction in the bond market and there was a positive reaction in equities. Of the three, I would say, really, the only lasting effect was on the equity market.

For equities, we’re up a little more than six per cent from pre-cut levels, which is substantial.

I do think the bank’s cut did probably play a role in some of the aggressive mortgage rate cuts we’ve seen among banks in recent months.

I think it would be pretty tough to justify a rate increase any time soon — unless oil prices came flaring back and there was a view that this was sustainable. But I suspect though the bank will be very slow to turn around. They’ll be very cautious, wanting to see the full impact of the oil collapse in oil prices over the past year. We’re forecasting them staying on hold over the next year and start raising rates in the second half of 2016.

Craig Alexander, TD Economics chief economist

“The rate cut in January provided some stimulus to the Canadian economy, but the impact was very slight. Interest rates were already incredibly low, and much of the drop in yields in the early months of the year reflected a rally in global fixed income markets, which has now reversed course.

I don’t think the Bank of Canada needs to cut rates further, or should cut rates further. I worry about household debt, and consumers don’t need more incentive to leverage their finances.

If the Canadian economy fails to rebound from the likely flat reading of economic growth in Q1, I think the bank will start to consider further cuts.

However, I would urge them not to cut again unless it looks like the economy is heading for another downturn. They are already providing massive stimulus, and it is leading to an indebtness problem that will need to be addressed in the future.”

Avery Shenfeld, chief economist, CIBC World Markets

“The rate cut was only of marginal significance through the interest rate channel, but the Canadian dollar is likely weaker than it would have been otherwise, as it underscored to markets that the Bank of Canada will also not be hiking when the Fed does so. A weaker trading range for the Canadian dollar will, with a lot of patience, help the export sector rebuild.

Given that the impact was largely through the exchange rate, the Bank of Canada could be compelled to cut again if we saw the combination of continued slow growth and an appreciating Canadian dollar that threatened to undermine the desired rotation to improved export performance.

Dawn Desjardins, assistant chief economist, Royal Bank of Canada

The bank’s decision to cut resulted in an easing in financial conditions and in turn an acceleration in business borrowing via increases in longer-term financing, and short-term financing providing the capital needed for firms to increase investment to expand capacity — outside the oil and gas sector.

We expect the bank’s next move will be a rate hike, based on our view that the economy will grow at an above-potential pace in upcoming quarters resulting in the output gap closing in the middle of 2016.

Emanuella Enenajor, senior economist, BofA Merrill Lynch

The main channel of the Bank of Canada rate cut was through mortgage rates. The easing in the overnight rate contributed to a slight decline in Canadian mortgage rates, supporting an increase in house prices and credit demand.

A rate cut would be justified if it is clear that the Canadian economy is set to grow notably below the BoC’s forecast, a sign of a persistently negative output gap and persistent downside inflationary risk.

Derek Holt, vice-president, Scotiabank Economics

“I think the cut had a modestly positive impact, but would place it second to the impact of broader global forces that had lowered bond yields and weakened the currency. Those global forces have now reversed significantly.

We forecast the BoC to be on hold throughout 2015-16. To hike before then would require large unexpected upsides to growth and for the temporary upward influences on core inflation to be more permanent in nature. “

Sherry Cooper, chief economist, Dominion Lending Centres

I think the rate cut was warranted. It did lead to lower mortgage rates, which does spur housing and/or put more money in people’s pockets. It did lower the Canadian dollar, which boosts exports at the margin.

There will be no rate increase until next year and not until we are much closer to full capacity utilization and two-per-cent inflation.